Oxstones Investment Club™By Pedro Nicolaci da Costa, WSJ Blog,
China’s overall debt load has risen quickly since the global financial crisis. While still manageable, it raises some concerns for investors, the McKinsey Global Institute says in a new report.
The prospect of a major economic slowdown in China is among the key concerns for policy makers and investors in a turbulent global outlook. Many believe the Chinese government has the resources to manage a smooth transition to a slower growth rate without causing a financial crisis.
But the speed of Chinese debt growth, much of it related to real estate, raises risks that an unwinding of the country’s two-decade growth boom might not go down so smoothly.
Here are some key facts from the report.
Total Debt Equals 282% of GDP: That’s how big China’s total debt load, including borrowing by the government, banks, corporations and households, had gotten by the middle of 2014, the report says. That’s far above the average for developing countries and higher than some advanced economies including Australia, the United States, Germany and Canada.
One-Third of Global Debt Growth: China’s economy, the world’s second-largest, has added $20.8 trillion in new debt since 2007, accounting for more than a third of total debt growth globally in that period.
Corporate Debt Soars, Especially in Real Estate: The largest driver of this growth has been borrowing by non‑financial corporations, including property developers. At 125% of GDP, China now has one of the highest levels of corporate debt in the world.
Shanghai or New York? After a steep rise in property values in recent years, some high-end real estate prices in Beijing and Shanghai are starting to approach those of Paris and New York.
The three major risks identified in the McKinsey report:
- About half the debt of households, non-financial firms and government is either directly or indirectly linked to real estate.
- Rapid growth in lending by local governments, “many of which may not be able to repay”
- Around a third of total outstanding debt in China is provided by a highly opaque shadow banking system, made up of various forms of non-bank lending.
“A plausible concern is that the combination of an overextended property sector and unsustainable finances of local governments could result in a wave of loan defaults in China, damaging the regular banking system and potentially creating a wave of losses for investors and companies that have put money into shadow banking vehicles,” the report says.
While damaging to economic growth, the Chinese government “could probably bail out the financial sector even if default rates were to reach crisis levels,” the McKinsey Global Institute said. “This would most likely prevent a full-blown financial crisis.”
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